New Liberalised External Commercial Borrowings

The Reserve Bank of India (RBI) has recently issued series of Circulars amending and liberalising current External Commercial Borrowings (ECB) Guidelines. The key changes introduced by these Circulars are:

For the Infrastructure Sector


(i)  As per the current Guidelines, repayment of existing Rupee loans is not a permissible end-use for ECB. Considering the specific need of the Infrastructure Sector, Indian Companies in the Infrastructure Sector, have now been permitted to utilise 25 percent of their fresh ECB raised towards refinancing of the Rupee loan/s availed by them from the domestic banking system under the Approval Route (i.e. with Prior RBI’s approval vide an application filed through the Authorised Dealer / Banker) subject to:

        (a) At least 75 percent of the fresh ECB proposed to be raised should be utilised for capital  expenditure towards a 'new infrastructure' project(s) as defined in the ECB Guidelines

        (b) The remaining 25 percent can be utilised for refinance / repayment of the Rupee loan availed for 'capital expenditure' of earlier completed infrastructure project(s) and

        (c) The above refinance to be utilised only for the Rupee loans which are outstanding in the books of the financing bank concerned.

(ii) Towards the above, an application needs to be filed by the eligible Applicant to the RBI through the Authorised Dealer (AD) / Bank along with prescribed details and documents. The AD is obliged to monitor the end-use of funds. Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement. Bridge Finance for Infrastructure Sector

(i) The Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) have now been permitted to import capital goods by availing short term credit (including buyers’ / suppliers’ credit) in the nature of ‘bridge finance’ with prior RBI’s approval (i.e. under the Approval Route) subject to the following terms and conditions:

(a) The bridge finance to be replaced with a long term ECB;
(b) The long term ECB to comply with all the extant ECB norms; and
(c) Prior RBI approval to be sought for (a) above.

(ii) The AD / Bank needs to monitor the end-use of the funds and is also obliged to verify the evidences for import of capital goods (i.e. Bill of Entry, etc). Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement.

ECB - Rationalisation and Liberalisation (i) The enhanced limits for ECB under the Automatic Route are as under:

Eligible Borrowers	Current Limit	Enhanced Limit
Real Sector- Industrial Sector-Infrastructure Sector	USD 500 million or equivalent per financial year	USD 750 million or equivalent per financial year
Corporate(s) in specified Service Sectors viz. Hotel, Hospital and Software	USD 100 million or equivalent per financial year (as stipulated)	USD 200 million or equivalent per financial year (as stipulated)

(ii) The ECBs can now be designated in INR as under:

(a) All Eligible Borrowers can now avail ECBs in INR from Foreign Equity Holders under the Automatic or the Approval Route as per the extant ECB Guidelines.
(b) NGOs engaged in micro finance activities can avail ECBs designated in INR as hitherto under the Automatic Route from Overseas Organisations and Individuals as per extant ECB Guidelines.

(iii)The Interest during Construction (IDC) is now considered as a permissible end-use for Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) under the Automatic/Approval Route, as the case may be, subject to the conditions that (a) the IDC is capitalised; and (b) is part of the project cost.

Infrastructure Sector

(i) The Policy relating to Structured Obligations has been liberalised to permit direct foreign equity holder(s) as per extant ECB guidelines (i.e. minimum holding of 25 percent of the paid up capital) and indirect foreign equity holder (atleast 51 percent of the paid-up capital) to provide credit enhancement to Indian companies engaged exclusively in the development of Infrastructure Sector (as defined in the RBI’s ECB Guidelines and Guidelines for the Infrastructure Finance Companies, which have been classified as such by the RBI).

(ii) The credit enhancement by all eligible non-resident entities is now permitted under the Automatic Route (without any prior RBI approval) subject to applicable guidelines and conditions.

Foreign equity holders

(i) Currently, for availing ECBs under the Automatic Route, a ‘foreign equity holder’ is considered as ‘recognised lender’ subject to the following:

(a) For ECB up to USD 5 million: minimum paid-up equity of 25 percent held directly by the lender; and
(b) For ECB more than USD 5 million: minimum paid-up equity of 25 percent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB does not exceeds four times the direct foreign equity holding).

(ii) The above norms have been liberalised as under:
(a) The term 'debt' in the debt-equity ratio has been replaced with 'ECB liability' and the ratio will be known as 'ECB liability'-equity ratio to make the term signify the true position as other borrowings/debt are not to be considered in working out this ratio.
(b) Further, besides the paid-up capital, free reserves (including the share premium received in foreign currency from the lender(s) concerned) as per the latest audited balance sheet will be reckoned for the purpose of calculating the equity of the foreign equity holder. If there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned will be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB.
(c) For calculating the ECB liability, besides the proposed ECB, any outstanding ECB from the same foreign equity holder lender should also be reckoned

(iii)The ECB proposals by Eligible Borrowers from their Foreign Equity Holders (both Direct and Indirect) and Group Companies will now be considered by RBI under the Approval Route as under:-

(a) Service sector units, in addition to those in Hotels, Hospitals and Software, would also be considered as Eligible Borrowers if the ECB is obtained from Foreign Equity Holders. This amendment is intended to facilitate overseas borrowings by Training Institutions, R &D, Miscellaneous Service Companies, etc;
(b) The ECB from Indirect Equity Holders to be considered provided the Indirect Equity Holding by the lender in the Indian company is at least 51 percent; and
(c) The ECB from a group company to also be permitted provided both the Borrower and the Foreign Lender are subsidiaries of the same parent.
(d) The total outstanding ECB, including the proposed ECB from a foreign equity lender, cannot exceed 7 times the equity holding, either directly or indirectly of the Lender (in case of lending by a Group Company, equity holdings by the common parent would be reckoned).